Thought some of you might be interested in how the returns of the new temporary 120 loan program stacks up to the old PLP 2-4 on a cash flow basis. Here is what my calculations tell me.
Starting with the old PLP 2-4, I assume that you take cash every 4 months and reloan the principal. If you did this with $1000, the cash flow diagram would look like this:
I was mistaken earlier, you don't need a financial calculator to do this, but if you were to do this the proper way, you'd put the following into your financial calculator or spread sheet function:
N = 3 (4 month) periods
PV (present value) = -1000.00
PMT (period payment) = 660.00
FV (future value) = +1000.00
Solving for I (interest rate) gives you 66% per 4 month period (which you could've gotten without a calculator). To get the annualized rate, we multiply this by 3 to get
198%
Now for the new program. Using the same assumptions as in the previous example, the cash flow diagram looks like this:
The parameters for this program look like this:
N = 6 (2 month) periods
PV (present value) = -1000.00
PMT (period payment) = 250.00
FV (future value) = +1000.00
Solving for I (interest rate) gives you 25% per 2 month period (again, which you could've gotten without a calculator). To get the annualized rate, we multiply this by 6 to get
150%
I used to buy and sell private notes and this is how we would do these calculations.
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